Commonly Used Terms

Arbitrage - The simultaneous purchase and

sale of similar commodities in different
markets to take advantage of a price
discrepancy.

Arbitration - The process of settling disputes

between parties by a person or persons
chosen or agreed to by them.
 Commonly Used Terms
At-the-Money Option - An option whose strike price is
equal—or approximately equal—to the current market
price of the underlying futures contract.

Backwardation - A theory developed in respect to the price

of a futures contract and the contract's time to expire.
Backwardation says that as the contract approaches
expiration, the futures contract will trade at a higher price
compared to when the contract was further away from
expiration. This is said to occur due to the convenience
yield being higher than the prevailing risk free rate.
 Commonly Used Terms
Basis - The difference between the current cash price of a
commodity and the futures price of the same commodity.

Basis = Futures – Spot

Bear Market (Bear/Bearish) - A market in which prices are

declining. A market participant who believes prices will
move lower is called a “bear.”A news item is considered
bearish if it is expected to result in lower prices.
 Commonly Used Terms
Bid - An expression of willingness to buy a
commodity at a given price; the opposite of
Offer.

Bull Market (Bull/Bullish) - A market in which

prices are rising. A market participant who
believes prices will move higher is called a
“bull.” A news item is considered bullish if it is
expected to result in higher prices.
 Commonly Used Terms
Call Option - An option which gives the buyer
the right, but not the obligation, to purchase
(“go long”) the underlying futures contract at
the strike price on or before the expiration date.

Carrying Broker - A member of a futures

exchange, usually a clearinghouse member,
through which another firm, broker or customer
chooses to clear all or some trades.
 Commonly Used Terms
Carrying Charge - The cost of storing a physical
commodity, such as grain or metals, over a period of
time. The carrying charge includes insurance, storage
and interest on the invested funds as well as other
incidental costs. Also referred to as Cost of Carry.

Cash Commodity - The actual physical commodity as

distinguished from the futures contract based on the
physical commodity. Also referred to as Actuals.
 Commonly Used Terms
Cash Settlement - A method of settling certain
futures or options contracts whereby the
market participants settle in cash (rather than
delivery of the commodity).

Circuit Breaker - A system of trading halts and

price limits on equities and derivatives markets
designed to provide a cooling-off period during
large, intraday market declines.
 Commonly Used Terms

Clearinghouse - An agency or separate corporation of

a futures exchange that is responsible for settling
trading accounts, collecting and maintaining margin
monies, regulating delivery and reporting trade data.
The clearinghouse becomes the buyer to each seller
(and the seller to each buyer) and assumes
responsibility for protecting buyers and sellers from
financial loss by assuring performance on each
contract.
 Commonly Used Terms

Clearing Member - A member of an exchange clearinghouse

responsible for the financial commitments of its customers.
All trades of a non-clearing member must be registered and
eventually settled through a clearing member.

Contango - is when the futures price is above the expected

future spot price. Because the futures price must converge
on the expected future spot price, contango implies that
futures prices are falling over time as new information
brings them into line with the expected future spot price,
 Commonly Used Terms
Contract Month - The month in which delivery
is to be made in accordance with the terms of
the futures contract. Also referred to as Delivery
Month.

Convergence - The tendency for prices of

physical commodities and futures to approach
one another, usually during the delivery month.
 Commonly Used Terms
Covered Option - A short call or put option position
which is covered by the sale or purchase of the
underlying futures contract or physical commodity.

Cross-Hedging - Hedging a cash commodity using a

different but related futures contract when there is no
futures contract for the cash commodity being hedged
and the cash and futures market follow similar price
trends (e.g., using soybean meal futures to hedge fish
meal).
 Commonly Used Terms
Day Order - An order that if not executed
expires automatically at the end of the trading
session on the day it was entered.

Day Trader - A speculator who will normally

initiate and offset a position within a single
trading session.
 Commonly Used Terms
Default - The failure to perform on a futures contract as required
by exchange rules, such as a failure to meet a margin call or to
make or take delivery.

Derivative - A financial instrument, traded on or off an exchange,

the price of which is directly dependent upon the value of one or
more underlying securities, equity indices, debt instruments,
commodities, other derivative instruments, or any agreed upon
pricing index or arrangement. Derivatives involve the trading of
rights or obligations based on the underlying product but do not
directly transfer property. They are used to hedge risk or to
exchange a floating rate of return for a fixed rate of return.
 Commonly Used Terms
Electronic Order - An order placed electronically
(without the use of a broker) either via the
Internet or an electronic trading system.

Electronic Trading Systems - Systems that allow

participating exchanges to list their products for
trading after the close of the exchange’s open
outcry trading hours. (MCX, NMCE, NCDEX)
 Commonly Used Terms
Exercise - The action taken by the holder of a call
option if he wishes to purchase the underlying futures
contract or by the holder of a put option if he wishes
to sell the underlying futures contract.

Expiration Date - Generally the last date on which an

option may be exercised. It is not uncommon for an
option to expire on a specified date during the month
prior to the delivery month for the underlying futures
contracts.
 Commonly Used Terms
Forward (Cash) Contract - A contract which requires a
seller to agree to deliver a specified cash commodity
to a buyer sometime in the future. All terms of the
contract are customized, in contrast to futures
contracts whose terms are standardized. Forward
contracts are not traded on exchanges.

Fundamental Analysis - A method of anticipating

future price movement using supply and demand
information.
 Commonly Used Terms
Futures Contract - A legally binding agreement to buy or sell a
commodity or financial instrument at a later date. Futures
contracts are standardized according to the quality, quantity and
delivery time and location for each commodity. The only variable
is price.

Hedging - The practice of offsetting the price risk inherent in any

cash market position by taking an equal but opposite position in
the futures market. A long hedge involves buying futures
contracts to protect against possible increasing prices of
commodities. A short hedge involves selling futures contracts to
protect against possible declining prices of commodities.
 Commonly Used Terms
In-the-Money Option - An option that has intrinsic
value. A call option is in-the-money if its strike price is
below the current price of the underlying futures
contract. A put option is in-the-money if its strike price
is above the current price of the underlying futures
contract.

Initial Margin - The amount a futures market

participant must deposit into a margin account at the
time an order is placed to buy or sell a futures contract.
 Commonly Used Terms
Intrinsic Value - The amount by which an
option is in-the-money.

Leverage - The ability to control large dollar

amounts of a commodity with a comparatively
small amount of capital.
 Commonly Used Terms
Liquidate - To take a second futures or options position opposite to
the initial or opening position. To sell (or purchase) futures
contracts of the same delivery month purchased (or sold) during an
earlier transaction or make (or take) delivery of the cash
commodity represented by the futures market. Also referred to as
Offset.

Liquidity (Liquid Market) - A characteristic of a security or

commodity market with enough units outstanding to allow large
transactions without a substantial change in price.
 Commonly Used Terms
Long - One who has bought futures contracts
or owns a cash commodity.

Maintenance Margin - A set minimum margin

(per outstanding futures contract) that a
customer must maintain in his margin account
to retain the futures position.
 Commonly Used Terms
Margin - An amount of money deposited by both
buyers and sellers of futures contracts and by sellers of
options contracts to ensure performance of the terms
of the contract (the making or taking delivery of the
commodity or the cancellation of the position by a
subsequent offsetting trade).

Margin Call - A call from a clearinghouse to a clearing

member, or from a broker or firm to a customer, to
bring margin deposits up to a required minimum level.
 Commonly Used Terms
Mark-to-Market - To debit or credit on a daily basis
a margin account based on the close of that day’s
trading session. In this way, buyers and sellers are
protected against the possibility of contract default.

Market Order - An order to buy or sell a futures or

options contract at whatever price is obtainable
when the order reaches the trading floor.
 Commonly Used Terms
Naked Option - A short call or put option position which is
not covered by the purchase or sale of the underlying
futures contract or physical commodity.

An opening transaction in an option when the underlying

asset is not owned. An investor writing a call option on 100
shares of IBM without owning the stock is writing a naked
option. If the stock is called by the option holder, the writer
must purchase shares in the market for delivery and is
therefore caught naked. Also called uncovered option
 Commonly Used Terms
Notice Day - Any day on which a clearinghouse issues notices of intent to
deliver on futures contracts.

Open Interest - The total number of futures or options contracts of a given

commodity that have not yet been offset by an opposite futures or option
transaction nor fulfilled by delivery of the commodity or option exercise.
Each open transaction has a buyer and a seller, but for calculation of open
interest, only one side of the contract is counted.
• Trader A enters a long trade by buying one contract
– Open interest increases to 1
• Trader B enters a long trade by buying four contracts
– Open interest increases to 5
• Trader A exits their trade by selling one contract
– Open interest decreases to 4
• Trader C enters a short trade by selling four contracts
– Open interest increases to 8
 Commonly Used Terms
Open Outcry - A method of public auction for making
bids and offers in the trading pits of futures exchanges.

Option Contract - A contract which gives the buyer the

right, but not the obligation, to buy or sell a specified
quantity of a commodity or a futures contract at a
specific price within a specified period of time. The
seller of the option has the obligation to sell the
commodity or futures contract or buy it from the option
buyer at the exercise price if the option is exercised.
 Commonly Used Terms
Option Premium - The price a buyer pays (and a seller
receives) for an option. Premiums are arrived at through
open outcry. There are two components in determining
this price—extrinsic (or time) value and intrinsic value.

Out-of-the-Money Option - A call option with a strike

price higher or a put option with a strike price lower
than the current market value of the underlying asset,
(i.e., an option that does not have any intrinsic value).
 Commonly Used Terms
Over-the-Counter Market (OTC) - A market where
products such as stocks, foreign currencies and
other cash items are bought and sold by telephone
and other electronic means of communication
rather than on a designated futures exchange.

Overbought - A technical opinion that the market

price has risen too steeply and too fast in relation
to underlying fundamental factors.
 Commonly Used Terms
Oversold - A technical opinion that the market
price has declined too steeply and too fast in
relation to underlying fundamental factors.

Par - The face value of a security.

Position - A commitment, either long or short,

in the market.
 Commonly Used Terms
Position Trader - A trader who either buys or sells
contracts and holds them for an extended period
of time, as distinguished from a day trader.

Put Option - An option which gives the buyer the

right, but not the obligation, to sell the underlying
futures contract at a particular price (strike or
exercise price) on or before a particular date.
 Commonly Used Terms
Pyramiding - The use of unrealized profits on
existing futures positions as margin to increase
the size of the position, normally in
successively smaller increments.

Range - The difference between the high and

low price of a commodity during a given
trading session, week, month, year, etc.
 Commonly Used Terms
Scalper - A trader who trades for small, short-
term profits during the course of a trading
session, rarely carrying a position overnight.

Settlement Price - The last price paid for a

futures contract on any trading day. Settlement
prices are used to determine open trade equity,
margin calls and invoice prices for deliveries.
 Commonly Used Terms
Short - One who has sold futures contracts or
plans to purchase a cash commodity.

Speculator - A market participant who tries to

profit from buying and selling futures and
options contracts by anticipating future price
movements. Speculators assume market price
risk and add liquidity and capital to the futures
markets.
 Commonly Used Terms
Stop Order - An order that becomes a market
order when the futures contract reaches a
particular price level. A sell stop is placed below
the market, a buy stop is placed above the market.

Strike Price - The price at which the buyer of a call

(put) option may choose to exercise his right to
purchase (sell) the underlying futures contract.
Also called Exercise Price.
 Commonly Used Terms
Technical Analysis - An approach to analysis of
futures markets which examines patterns of
price change, rates of change, and changes in
volume of trading, open interest and other
statistical indicators.

Tick - The smallest allowable increment of price

movement for a futures contract. Also referred
to as Minimum Price Fluctuation.
 Commonly Used Terms
Time Value - The amount of money options
buyers are willing to pay for an option in
anticipation that over time a change in the
underlying futures price will cause the option to
increase in value. In general, an option premium
is the sum of time value and intrinsic value. Any
amount by which an option premium exceeds
the option’s intrinsic value can be considered
time value. Also referred to as Extrinsic Value.
 Commonly Used Terms
Uncovered Option - A short call or put option
position which is not covered by the purchase or
sale of the underlying futures contract or physical
commodity. Also referred to as a Naked Option.

Variation Margin - Additional margin required to

be deposited by a clearing member firm to the
clearinghouse during periods of great market
volatility or in the case of high-risk accounts.
 Commonly Used Terms
Volatility - A measurement of the change in price over a given time
period.

Volume - The number of purchases and sales of futures contracts

made during a specified period of time, often the total transactions
for one trading day.

Warehouse Receipt - A document guaranteeing the existence and

availability of a given quantity and quality of a commodity in
storage; commonly used as the instrument of transfer of ownership
in both cash and futures transactions.
 Commonly Used Terms
Yield - A measure of the annual return on an
investment.

Yield Curve - A chart in which yield level is

plotted on the vertical axis, and the term to
maturity of debt instruments of similar
creditworthiness is plotted on the horizontal
axis.